Eq: Total Market
Active ETFs have grown in popularity, doubling in the last two years, and they are starting to reverse the 30-year index trend invented by John Bogle. Mutual fund giants such as Fidelity, T.Rowe Price, Franklin Templeton, and American Century all have opened active funds. Driving this inflow is a series of regulatory changes that protect active fund insights and make them more tax efficient. SEC regulations have allowed semitransparent ETFs to use custom baskets and move around stocks in order to not realize gains. Semitransparent ETFs have better liquidity which allows them to cut the high transactions costs of yesteryear. Some of the fastest-growing funds are Cathie Wood’s ARK Innovation, but JPMorgan’s Ultra-Short Income, PIMCO Enhanced Short Maturity and JPMorgan’s Equity Premium Income. Finally, the current environment is allowing active funds to edge out. Active funds have thematic interests that satisfy investors at lower costs than traditional funds, and pickers outperform when there is high dispersion (as there is now).
FINSUM: Active funds are cutting costs to some of the lowest levels historically and in these tumultuous times that makes them as competitive as ever.
Whether the US’ current bout of inflation is caused by transitory supply-side factors, or trillions of dollars poured into the economy by policymakers, is irrelevant because investors are now tasked with finding a way through the stock market jitters. As inflation rises it eats at yields and the value of fixed coupons falls. To avoid the pitfalls of rising prices look to dividend stocks, whose yields are pushed higher by inflation. Of course not all dividend stocks are created equal and some will outperform in an inflationary environment. The best income stocks are in the financial sector because they benefit from rising interest rates, as their interest rate margins expand in such environments. Energy is next, at least currently. Higher demand boosts prices of oil and gas, which benefits energy sector investors as it is one of the highest dividend payers. These sectors are the most likely to boost their dividends in the rising price environment.
FINSUM: Dividend stocks have no doubt outperformed just about every segment of the bond market, and expanding your dividend holdings may be a good idea as inflation comes in at 20-year highs.
September saw the Vix creep to a 4-month high as the S&P 500 blew off 4.8% of its value. Most investors were hoping for a bounce-back month in October, chalking up September’s poor performance to a checkered history for the opening of autumn. However, they are likely to be remiss as volatility indexes are still climbing. The pullback in September was the largest since March of 2020, when the pandemic began.BofA said that while October is generally a well-performing month when it trails a struggling September, October can drag as well. Debt ceiling negotiations, oil price spikes, and Fed tapering are just a few of the onslaught of headlines which are giving the market fits.
FINSUM: While volatility has yet to hit the peaks of September it is already consistently above its 200-day moving average, which could be a sign of even more volatility to come.
In our continued coverage of Morningstar’s top model portfolios, today we are featuring those ranked 6-10. Morningstar is soon going to double the coverage of the growing model portfolio universe, which is great news for advisors having trouble deciding on which to choose. Without further delay, here are the rankings. Number 10: Vanguard S&P (Silver rating). Number 9: Vanguard Russell (Silver rating). Number 8: Vanguard CRSP (Silver rating). Number 7: American Funds Tax Aware Income (Silver rating). Number 6: American Funds Tax Aware Growth and Income (Silver rating).
FINSUM: Well the list isn’t very diverse in terms of managers, but the Russell model from Vanguard looks like an interesting way to play small caps. Additionally, given Biden’s proposals, tax aware income would be a wise strategy in which to take a holistic approach.
Bank of America put out a stern warning this week. A team of Bank of America equity strategists led by Ohsung Kwon says that the current market looks eerily like the one in the fourth quarter of 2018, when stocks fell 20%. The market is experiencing some concerns on near-term earnings as companies cut back forecasts. According to Kwon, “The nearest memory of early cycle companies' impact on the market is almost exactly three years ago when companies warned about tariffs and slowing macro conditions during 3Q18 earnings … Those warnings and a hawkish Fed resulted in a 20% decline in the S&P 500”.
FINSUM: 2018 came within a hair of a full bear market. That feels too bearish given the overall trajectory of growth. If Congress doesn’t get the debt ceiling raised, though, all bets are off.